WINNIPEG, Manitoba, March 25 (Reuters) - Canada's government should
investigate what it costs rail carriers to ship grain, farm groups said
on Tuesday, releasing a study which implied railways are reaping
unreasonable profits.

Canadian National Railway and Canadian Pacific Railway get a 50 percent
return on their variable costs, according to estimates by rail analyst
John Edsforth.

That's more than double what they were allowed to earn before rail laws
were overhauled in 2000, and twice what they would earn if there was
more competition, Edsforth said in a study commissioned by the Canadian
Wheat Board.

A coalition of farm organizations said in a statement the carriers make
at least C$100 million ($98 million) per year in "unreasonably excessive
returns."

"We're not against the railways making a profit," said Bob Friesen,
president of the Canadian Federation of Agriculture. "But one's profit
should not come at the other's very large expense."

The farm groups said the revenue caps are based on railway costs from a
1992 review.

But the grain transportation system has since changed dramatically, the
groups said. There are only 370 elevators across the Canadian Prairies,
down from 1,500 in 1992, and most grain is shipped in efficient units of
at least 50 rail cars.

The farm groups said freight rates have increased in recent years while
service levels have declined.

Rail service and rates have always been a thorn in the side of
landlocked Canadian farmers, who on average rail their grain 1,500
kilometers (940 miles) to port.

That's more than twice the distance that competitors in Kansas or Russia
face, the farm groups said on Tuesday.

The Canadian Transportation Agency recently ruled CN's service to small
shippers and the Canadian Wheat Board was inadequate last year. The
regulator is reviewing data for the current year for an ongoing
complaint against the railway.

The federal government will review railway service as part of new
legislation that passed earlier this year, but the farm groups said they
also want a full review of rail costs.

In January, the transportation regulator reduced the rail revenue cap by
about C$72 million. The railways are appealing.

Canadian National Railway, the country's largest rail line, complained
this month that it was being hurt financially by the "creeping
re-regulation" of its grain transportation business.

CN said Canada's hauling rates were already among the lowest in the
world and "significantly less" than in the United States. It accused the
government of using the rate system to transfer income from the carriers
to the farmers.

CN generated C$1.3 billion in revenue from hauling grain and fertilizers
in Canada and the United States in 2007.

Canadian Pacific Railway said its grain revenue was nearly C$940 million
last year.